The energy sector has been the second quarter’s best performer. When it comes to exchange traded funds, traditional cap-weighted offerings, such as the Energy Select Sector SPDR (NYSEArca: XLE) and iShares U.S. Energy ETF (NYSEArc: IYE), have been prime beneficiaries of investors’ renewed affinity for energy stocks.
An often heard criticism of cap-weighted energy ETFs is large, arguably excessive exposure to Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX), the two largest U.S. oil companies. Equal-weight ETFs like the Guggenheim S&P Equal Weight Energy ETF (NYSEArca: RYE) help investors dodge uncomfortable exposure to those stocks, which has not been a bad idea.
Year-to-date, XLE is up almost 13% despite an average gain of just 2.7% from Exxon and Chevron, confirmation that the energy sector’s upside, while in large part attributable to large-caps, cannot be tied to the sector’s two biggest companies. [Stick With Energy ETFs]
As an equal-weight ETF, RYE assigns weights ranging from 1.83% to 2.91% to its 44 holdings. Exxon and Chevron combine for just 2.4% of the ETF’s weight.
Much of the advantage of afforded by equal-weight ETFs over time is attributed to either higher weights to small-caps or a tilt toward value names. The latter is the case with energy ETFs. Take the example of the SPDR S&P Oil & Gas Exploration & Production ETF (NYSEArca: XOP).
Like RYE, XOP has scant exposure to Chevron and Exxon. XOP’s 83 holdings also have a weighted average market capitalization of almost $20 billion, firmly large-cap territory. Due the significant presence of large-caps throughout the energy sector, it is not a stretch to say the advantage of equal-weight strategies in the energy sector, such as those espoused by RYE and XOP, come by way of a value bias, not a small-cap premium. [Buy Energy ETFs Now]